Harlow bus terminal's cafe, the Sandwich Bar, located in a small arcade of tatty fast-food outlets and betting shops, has been in business for 53 years. But it's struggling. The once bustling Barclays bank opposite closed down last year and the cafe's owner, Gasko Vatansever, a former folk musician from Turkey, maintains that the Tories "only care about billionaires".

Despite this, Vatansever was one of the few who voted Conservative on Thursday – although he explains that this is only because of the regular custom of the man sitting at the window nursing a coffee, the local Tory MP, Rob Halfon. Halfon knows the Tory cause cannot rely just on such goodwill. There isn't much of it about. After four years of Conservative rule, the council switched to Labour last week while the Liberal Democrats were wiped out.

David Cameron's claim back in 2008 that sentiment in the Essex seat would be a guide to the winner of the next general election looks like it could be coming back to haunt him. The former Tory council leader, Andrew Johnson, not only lost power on Thursday but was also left consoling his wife, Shona, who also forfeited her seat. Johnson says it's all the fault of the national government, and Halfon, a former chief of staff to policy minister Oliver Letwin and no serial troublemaker, can only agree.

"We have not been good enough," Halfon said. "We don't have a narrative about what this government is about. If you are Labour, you go into politics to help the poor, which is a worthy goal, although I disagree with how they would do it.

"Our message has to be to encourage aspiration. Everything we do at the moment is seen through the prism of cuts, but we should constantly be thinking of those who are in work but struggling. The strivers."

Linda Pailing, the deputy chairman of Halfon's local party, puts it more starkly, targeting her criticism at the prime minister. "The national swing took us down and that is purely to do with what Cameron and his cronies are doing with the national party. The voters are disillusioned with Cameron himself. They don't like the fact that he didn't keep the 50p tax. That has really grated and people feel here that he is not working for them, he is working for his friends."

Thursday's local elections and a string of referendums in cities up and down the country, which saw Cameron's flagship plan for elected mayors rejected, were shocking for both the Conservatives and Liberal Democrats. While the Tories lost 405 seats, the Liberal Democrats had an equally, if not more, disastrous night, shedding more than 300 seats and sinking under a national total of 3,000 for the first time in their history. Boris Johnson's victory against Ken Livingstone in the race for mayor of London offered some relief to the Conservatives, but Tory celebrations were muted because the contest turned out to be far closer than had been expected.

It is not just the fact that Tories and Lib Dems fared badly themselves that is alarming activists and MPs of both parties – and raising doubts in the minds of many about the electoral effects of being in coalition. It is also that Labour – dismissed by the coalition as moribund and lacking in ideas under Ed Miliband – outperformed everyone's expectations, most of all its own. "Labour thrive on bad day for Tories" was yesterday's front-page headline in the normally Cameron-supporting Times.

As well as the symbolic gain from a Tory-Lib Dem coalition of Birmingham, Britain's second largest city, Labour made progress in many former Tory strongolds across the south, raising hopes that the "southern discomfort" that prevented it from forming a government from 1979 until the arrival of Tony Blair is easing again. Exeter and coastal towns such as Great Yarmouth, Southampton and Plymouth were claimed by the supposedly ineffectual Miliband's party.

In all, Labour added 823 seats, way beyond its most optimistic estimates. In Wales, Labour retook control of 10 councils, including Cardiff, Blaenau Gwent, Bridgend, Caerphilly, Merthyr Tydfil, Newport and Swansea, recording its best results since local government was reorganised in 1996. And in Scotland it did far better than it expected, holding on to Glasgow city council, where it saw off the SNP, and capturing Edinburgh. London was a blot, but one that Labour passed off on the candidate.

After a week in which Tony Blair let it be known that he wants to be more active in domestic politics, there are now signs that the party is sensing a great prize and finally getting behind Miliband.

Local election results, May 2012.

There are also indications that the Labour family is reuniting just as the coalition is rupturing. David Miliband told the Observer that Labour's extra 823 extra councillors were "very good news" and chimed with an "upbeat but sober" mood of determination he found on the doorstep, while campaigning for his brother. Clearly he wants to see more in terms of hard policy, but he, too, seems more prepared to engage. "The best news is that we have the chance for councils across the country to show how Labour make a real difference – and pioneer the new ideas that can go into the next Labour manifesto."

In Harlow, Halfon said he was stunned by the number of Labour people out working the seat in the run-up to polling day. "The Labour machine ran a Rolls-Royce of a campaign with Leninist discipline. Harlow was flooded with hundreds of their party activists and people from the Union of Shop, Distributive and Allied Workers which we just couldn't match. They brought a whole load from the front bench, and Tom Watson and Ed Miliband came. He was here twice. Our party machine needs to get better and wake up, to want to do to Labour what they did to us."

Before every set of local elections, parties predict that their opponents will gain far more seats than they think is realistic, so that when they come in below that level their performance can be painted as a flop. Before Thursday the Tories said Labour would gain 700 seats, expecting them not to get anywhere near. As Thursday night wore on, the Tory chairman, Baroness Warsi, seeing that Labour might actually reach and even surpass 700, suddenly increased the score it needed to 1,000.

Warsi's rapid change of estimate somehow captured the mood of the night, summing up a sense that coalition politicians were way out of touch with the public. After a disastrous few weeks which began with George Osborne's budget in March and progressed through a petrol crisis politically confected by Tory ministers, to revelations of sleazy Conservative links with Rupert Murdoch, the coalition was feeling far more heat than it had expected.

The local election results have brought Lib Dem and Tory MPs out into the open to demand that their parties assert their own identities more. The coalition is under strain as Conservative rightwingers demand that Cameron refuses Lib Dem demands on House of Lords reform, gay marriage and the environment.

Bernard Jenkin, the Tory chairman of the public administration select committee, suggested that if Cameron continued kowtowing to Lib Dems the Conservatives would never win a majority at a general election. "For a party to be electable it has to concentrate on what matters to voters, not descend into a vortex of House of Lords reform. We do not want to be a Conservative-led government. We want to be a Conservative government."

From the other side, Tim Farron, the Lib Dem party president, said Cameron and Clegg had to commit to speedy House of Lords reform in the Queen's speech and would get it through in two weeks, were it not for "a few rightwing extremists". Farron said "far more" had to be done on green policies, which many Tories see as a waste of money during a recession.

As the pressure mounts on the coalition partners, supporters of neither party are keen on more compromise with the other. As they fight for their own identity they are appalled by the idea, believing compromise is what is robbing them of identity and support on doorsteps. Least of all do Tories want to focus on Lords reform when the need is to create jobs and economic growth. "I really think Lords reform could destroy the coalition," said one senior Tory MP.

On Tuesday, however, Cameron and Clegg will renew their marriage vows, two years on from their post-election appearance in the Downing Street rose garden. On Wednesday, House of Lords reform will be the centrepiece of the Queen's speech. The coalition will continue despite the increasing fears of many Lib Dems and Tories that the trade-offs it necessitates represent the path to self-destruction.

Back in Harlow's Sandwich Bar, its owner, Vatansever, raises the local elections with customers. Perceptions do seem to be changing. "Labour at least seems to care," says one. "This government is useless, incompetent," adds another local businessman.

Vatansever says: "Everyone is scared of what happens next. I want to run a good cafe, not cut corners, stay in business, but what help does the government give me?"